The Price Is Right

President Trump’s aluminum and steel tariffs are likely to have little effect on outdoor power equipment dealer pricing.

The U.S. economy is growing as is evidenced by the strength of the Dow Jones Industrial Average.
The U.S. economy is growing as is evidenced by the strength of the Dow Jones Industrial Average.

Tariffs aren’t necessarily a bad thing. Specifically, Trump’s aluminum and steel tariffs from 2018. Without a doubt, they are going to (unfortunately) elevate material costs for manufacturers that produce equipment using aluminum and steel in the U.S.—but viewing them from a wider perspective lets you see that they are most likely going to contribute to the U.S.’s growing economy, and thus counteract the higher unit costs they create for manufacturers by helping them achieve a higher unit volume sold.

Since numbers don’t lie, let’s look at a simplistic profit forecast for an independent equipment dealer. Without the tariffs, let’s say the units cost the dealer $100 each, the dealer sells them for $150 each and the dealer sells 50 units in the coming year. In total, the dealer stands to profit $2,500. Now let’s add in the tariffs: With the raised material costs, the units now cost the independent equipment dealer $105 each.

Crunch the numbers and you find that this means the dealer would have to sell an additional six units to break even—assuming the price is kept the same (which would be a value-based strategy). The dealer could instead raise the price (doing so would be a cost-plus strategy) and not have to sell more, but doing so could potentially cause it to sell fewer units. Customers generally do not wish to spend more money for the same product.

This thought experiment illustrates the main question that is in every independent equipment dealer’s mind in regard to President Trump’s aluminum and steel tariffs, which is: How are they going to affect my prices? The short and easy answer to that question is that, granted the equipment you sell is made in the U.S. with aluminum and/or steel, they are going to cause prices to need to be raised.

Tariffs are a special tax placed on imported goods to help domestic suppliers. Raw aluminum and steel are going to be more expensive in the U.S., regardless if manufacturers are importing it or not, because tariffs don’t make the goods they are placed on cheaper to produce—they just make it easier for domestic suppliers to compete on price. Even though our economy is doing great, the fact of the matter is that other countries have us beat when it comes to aluminum and steel.

A longer but better answer to how tariffs are going to affect dealer pricing is that it is up to independent equipment dealers to determine how the tariffs are going to affect them, as only they themselves can set their prices. Raising their prices may seem like the only logical thing to do at first if they want to keep making the same profit—but as mentioned before—the U.S. economy is growing.

Evidence of this includes the hundreds of thousands of new manufacturing jobs, the steadily declining unemployment rate and the strength of the Dow Jones Industrial Average. A growing economy could lead to a greater number of end users for manufactured equipment. Think about it: More people working means that more people are going to be able to afford houses (which need to get built) and eat more (a boost to agriculture) and live in nice neighborhoods (a boost for landscaping).

It would be optimal to get customers to pay as much for your product as possible, but price optimization does not just mean setting your price to be the highest. There are many factors that go into pricing, one of which is your market size. When your product is getting more expensive to either make or buy, a saving grace would be that your market size is growing (therefore you stand to sell more products in the future).

In conclusion, since the U.S. economy is growing in ways that may increase demand for equipment, independent equipment dealers may not need to raise their prices in reaction to Trump’s steel and aluminum tariffs.